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Suggest a suitable arbitrage strategy for mispricing

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Reference no: EM132594669

The stock price of Top Gloves Bhd today is RM3.00. The call option on this stock with a strike price of RM2.00 and a 60 days maturity has an option premium of RM1.50. The put option with a strike price of RM2.00 and 60 days expiry possess a premium of RM1.20. The risk-free rate per annum is 5%.

Required:

(a) Prove that there is mispricing.

(b) Suggest a suitable arbitrage strategy for this mispricing.

Reference no: EM132594669

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